The Power Problem: Nearshoring and Mexico’s Energy Sector

Introduction

Nearshoring, understood as the transfer of investment and business operations to a nearby country, is a post-COVID-19 trend propelled by an increasing commercial rivalry between the United States and China and operationalized through the advent of new industrial policy in the U.S. Nearshoring constitutes an important window of opportunity for Mexico to capture much of the relocalization of supply chains to the country, given its proximity to U.S. markets, the business environment created by the United States-Mexico-Canada (USMCA) trade agreement, and the decades-long integration of binational production chains. Mexico’s power sector, however, is likely to impede its ability to take advantage of this historic opportunity. This report, which summarizes the results of a collaborative workshop between the Center for the U.S. and Mexico and Tecnológico de Monterrey focused on power and nearshoring, lays out a brief diagnostic of the state of the power sector in Mexico and new policies that the incoming government (2024–30), to be headed by Claudia Sheinbaum, can implement to actualize the promise of new investment in Mexico.

Session I: Surge in Nearshoring

Workshop participants explored the surge in nearshoring, which included an in-depth discussion of the forces propelling this new trend. These forces are:

• An analysis of the state of the U.S.-China economic rivalry, centered primarily on strategic industries, such as electric vehicles, batteries, artificial intelligence, etc. 
• An examination of U.S. industry policy — a feature shared by both the Trump and Biden administrations.
• An exploration of supply chain dynamics, especially after the COVID-19 pandemic and the Russian invasion of Ukraine further reinforced the impression of supply chain’s crucial vulnerabilities.
• A consideration of political conditions around the world. 

This diagnostic improved the general understanding of the need to relocate supply chains closer to U.S. markets. And given that nearshoring is defined as the relocalization of investment and business operations to nearby countries, the discussion also helped place Mexico as an important piece in Washington’s strategy to incentivize a manufacturing renaissance in North America, mainly because not all businesses can easily relocate back into the United States and maintain competitiveness. In addition, Mexico presents important advantages, beyond its location. These include the business environment cinched by the USMCA and decades of integration of manufacturing chains, which have resulted in a deep industrial ecosystem, well known to many American companies.

Session II: Challenges of Nearshoring

Nearshoring, however, is not assured. For Mexico to take advantage of it, certain public policies have to be designed to incentivize relocalization of industry to the country. Thus, participants laid out some of the challenges to nearshoring, focusing on Mexico’s position to take advantage of what is likely to be a massive reshuffling of supply chains worldwide. Among these challenges, participants identified the problem of energy, specifically the state of Mexico’s power sector. Participants engaged in discussions surrounding power demand patterns, the composition of the power generation landscape, the state of the transmission infrastructure, and investment considerations for expanding the power infrastructure throughout the country to take advantage of nearshoring opportunities. 

Session III: Power Requirements for Nearshoring 

Discussions honed in on the intersection of nearshoring and power requirements for industries associated with nearshoring, emphasizing the importance of renewable energy for the companies considering Mexico as a destination for their operations. There was wide agreement that this is a crucial area with far-reaching implications for Mexico, if it is to take advantage of this opportunity. Given the political priorities of the current administration and the near impossibility of meeting the power requirements of the nearshoring challenge due to a policy that discourages private sector investment, the administrative capacity of regulatory agencies not only decreases but also explicitly moves away from renewable energy. This reduced administrative capacity also affects the prospect of the relocation of many companies’ production facilities, as they will be seeking regulatory agencies to meet their commitments to combat climate change. Because no change in energy policy is expected in the remainder of the López Obrador administration (2018–24), the session further focused on some fundamental changes that the Mexican government will need to implement between 2024 and 2030 to take advantage of nearshoring.

By unraveling the complexities of the present scenario, participants laid the groundwork for comprehending the role of nearshoring in enticing changes to the energy sector's trajectory in Mexico. Through interactive dialogues, participants explored the role of renewables in electricity markets and discussed the necessity of a cleaner energy matrix in Mexico to effectively capitalize on new nearshoring investments.[1] By dissecting these intertwined themes, participants theorized potential synergies between nearshoring endeavors and renewable energy initiatives, steering toward sustainable and adaptive energy systems.

Power Problem: Need for Expanded and Renewable Energy

Mexico stands at a critical juncture, well positioned to leverage the relocation of supply chains from China to North America — specifically to countries with closer ties to the United States. In fact, current U.S. policies present a significant opportunity for economic growth and development in Mexico, but only if it implements the right policies to attract nearshoring investment. Indeed, to fully realize the country’s potential to attract nearshoring investment, firms will require access to sufficient and reliable power, ideally sourced from renewable sources. Many companies demand these conditions to operate effectively and also to align with their own commitments to meet certain Environmental, Social, and Governance (ESG) obligations. Unfortunately, Mexico’s energy sector, particularly the power sector, has faced a notable lack of investment in recent years: On one hand, it is insufficient to keep up with growing domestic demand and, on the other, it is certainly insufficient to provide for the demand needed for the nearshoring of supply chains, while doing so with less than environmentally friendly energy. 

In fact, current energy policies under the 2018–24 government may have led to increased electricity costs, environmental degradation, and decreased reliability, undermining Mexico’s attractiveness to potential investors. And given Mexico’s power generation reliance on nonrenewable sources and its current policies and regulations, the country appears at odds with the needs of firms seeking to relocate their productive operations to countries with sufficient, reliable, and environmentally friendly power. Current policies — largely restrictive of private investment in the electricity sector — moreover, have resulted in delays in new investments in power generation and transmission, thereby exacerbating existing challenges to the country’s ability to attract nearshoring investment at higher levels.

Box 1 — Mexico’s Power Sector

Additionally, there are concerns about insufficient power supply when the time comes for firms to expand their operations within the country — some firms already in Mexico have faced such challenges. Numerous companies were able to establish initial connections to the power grid, yet this was not necessarily the central problem. Instead, the issue was the power supply’s frequent delays due to additional demands from economic expansion. According to some participants from the business community, this usually emerges as a critical factor in industry localization decisions, sometimes leading to the abandonment of selected expansion sites due to inadequate power capacity.[4] Indeed, other analysis concur that Mexico will have an increasingly difficult time meeting power demands in the coming years, disincentivizing companies from doing business in the country, as they have to compete for limited power sources. Even the government acknowledges that power generation is hardly keeping up with demand.[5] The main reason for this limited power capacity is that the current infrastructure model relies primarily on government financing, which remains insufficient to provide the power required for nearshoring in the next decade. Moreover, expansion of energy infrastructure often falls on developers who must make significant investments to connect to the grid, ultimately driving up costs for companies and affecting overall competitiveness. 

The workshop argued that some larger companies with explicit international pledges to reduce their carbon footprint have also expressed concerns about Mexico’s apparent lack of commitment to renewable energy sources, as the country often prefers to rely on energy that does not help them meet their ESG obligations. The challenge of attracting companies becomes even more daunting in the absence of access to clean energy, particularly when energy availability is uncertain.

The current state of Mexico’s power sector, therefore, poses a formidable obstacle to nearshoring, jeopardizing the country's ability to fully capitalize on the opportunities presented by the shifting global economic landscape. Addressing these challenges is imperative to unlock Mexico's potential as a competitive destination for nearshoring and sustainable economic growth.   

How To Address Mexico’s Power Supply Issues

Workshop participants extensively deliberated on the state of Mexico’s power sector. This report draws on the most important conclusions by the participants, in the understanding that Mexico requires important policy changes if it is to take full advantage of supply chain nearshoring. In this section, we encapsulate three primary insights gleaned from these discussions: 

1. The environmental, regional, and global politics of nearshoring. 
2. The need for investment in transmission infrastructure. 
3. The requirement of market-oriented policy solutions and engagement in the energy transition. 

Nearshoring Politics: Environment, Southern Mexico, and China 

Nearshoring trends, propelled by U.S. industrial policy, climate change apprehensions, supply chain security and reliability concerns, as well as strategies to manage these concerns, offer substantial opportunities for the United States and Mexico. Although former President Trump was more motivated by a policy of containment toward China and President Biden seems more concerned with propelling the United States toward green energy leadership on a global scale, the outcome is the same — an industrial policy that seeks a manufacturing renaissance in North America. In this sense, there is remarkable policy continuity from one administration to the next. American industrial policy will likely continue on this path in the coming decade. Thus, addressing challenges associated with energy policies, protectionism, and geopolitical uncertainties is imperative to maximize the benefits of nearshoring initiatives and promote sustainable economic development in the region. Mexico is a key partner in these efforts.

The surge in nearshoring activities in the United States is driven by various factors, including U.S. public investment to incentivize relocation and tariffs imposed on Chinese goods. To bolster domestic manufacturing and reduce reliance on overseas production, U.S. industrial policy seeks to incentivize companies to relocate manufacturing operations, preferably back into the United States or, alternatively, closer to home. Additionally, tariffs on Chinese imports have prompted U.S. companies to seek alternative sourcing options, further fueling the nearshoring trend. Improved supply chain management strategies and growing concerns about climate change have also significantly driven nearshoring initiatives.[6]

It is worth emphasizing, however, that American industrial policy is designed to aid the relocation of companies to the United States — reshoring. Nearshoring is an important concept in Mexico, given its proximity and access to the U.S. market. Based on this, Mexico’s government has seen this as a new opportunity to propel further industrial development in the country. The 2018–24 government has also said that at least some development should be channeled to Mexico’s poor southern states. However, it will be difficult or impossible to channel development to these states if the country does not implement effective public policies to incentivize industry relocation to southern Mexico — including the provision of a sufficient, reliable, and clean energy supply. 

For decades, U.S. companies have favored locating their operations in northern border states and, more recently, in the Bajío central region. For example, Amazon Web Services announced an investment of over $5 billion to open a cluster of data centers in Querétaro.[7] Without policy changes, most companies will continue to gravitate to northern and central Mexico — including the expansion of power generation and transmission infrastructure. However, other factors also determine companies’ relocation decisions. Tesla’s initial insistence on locating part of its production in the state of Nuevo León has to do with its nearby access to energy supplies from the United States, further underscoring the importance of energy in relocation decisions. In the aftermath, the postponement of the construction of the Tesla plant in Monterrey had to do with company decisions rather than power supply issues. 

The development of southern Mexico is in a state of historical debt, as this process has failed for, at least, the past 40 years and will unfortunately continue to fail unless the government makes massive investments in this region. The present federal administration has begun some infrastructure rail projects in the Tehuantepec Isthmus and Yucatan Peninsula. However, these are, at best, only initial steps in a long-term development program, as it has yet to be seen whether these projects will succeed. None of these current projects do anything to enhance the kind of power supply required to incentivize companies to relocate to southern Mexico. 

Of course, these infrastructure projects could indeed enable development in southern Mexico if complemented by further intermodal freight infrastructure, port modernization, and investment in mobility. But even they will not solve the long-term development problem. Infrastructure alone will not be able to trigger a sustainable development process without a significant increase in the availability of sufficient, reliable, and clean electric power to encourage companies’ decisions to relocate there. 

To be sure, Mexico’s advantages in partaking in nearshoring trends on a global scale remain important. However, even if the nearshoring narrative is part of Mexico’s rhetoric, the two economies of Mexico and the United States have grown to complement each other over the life of the North American Free Trade Agreement (NAFTA), now USMCA. There is reason to assume that this trend will continue and that nearshoring-oriented policies will only accelerate this trend. Politically, it is important to note that the USMCA was approved under some of the most nationalistic administrations in both countries since World War II. This highlights the resilience of binational integration and the depth of economic ties, which can transcend political headwinds.

In effect, the bilateral economic relationship between the United States and Mexico is integral to the success of supply chain relocation for both countries. While protectionist measures implemented by the United States, such as tariffs on Chinese imports, may have short-term benefits for specific industries, they could have adverse long-term effects on overall trade relations, distorting trade flows and giving some trade partners key advantages over others. But even though Mexico is well positioned to be an important beneficiary of the nearshoring trend, collaborative efforts between the United States and Mexico to address trade issues and foster a conducive environment for investment are essential for sustaining nearshoring activities and promoting economic growth in the southern region. Yet, this will require a radical shift in Mexico’s policies to accommodate interest in nearshoring toward impoverished parts of the country. That involves, of course, a reconsideration of current policy regarding the country’s power sector.

These nearshoring trends have not been lost on China. In fact, Chinese companies have already been relocating their own production chains closer to American markets. China’s offshoring activities to Canada and its status as a major trading partner with Mexico underscore the complex dynamics at play in the nearshoring landscape. The potential for increased investment from Chinese-owned or U.S.-owned companies relocating to northern Mexico presents opportunities for economic growth. In that sense, Mexico is already becoming a beneficiary of industry relocation, not only from U.S. companies but also from Chinese companies, which are finding it advantageous to ramp up production inside the walls of North America.[8] Of course, concerns about tariffs and trade disputes between the United States and China could affect nearshoring decisions and necessitate careful consideration of potential risks and challenges, particularly in the electric vehicle (EV) and EV battery industry, where the U.S. government will likely ban all or most Chinese and Mexican imports.[9] Considering this, Chinese investments in Mexico will come under increased scrutiny from Washington, and Mexico must ensure that China complies with all trade regulations under the USMCA. 

Transmission: Infrastructure Issues and Investment Opportunities

While workshop participants concurred that power generation poses significant challenges to Mexico’s ability to capture nearshoring investment; most also agreed that the biggest hurdle in the Mexican power sector does not lies in generation capacity. Private investment in power generation has been possible since the Constitutional Energy Reform of 2013, which remains the current law. However, there are concerns that major policy changes from the current administration in its last days or executed by the Sheinbaum administration might be necessary to unlock the power supply’s full potential.[10] Markets so far are skeptical.

Distributed generation (DG) can help alleviate some of the local demand in targeted regions, but the country is lagging in its transmission infrastructure (Table 1). Put differently, it is possible to speak of sufficient power generation — as, thus far, the instruments to increase it are still in place, but the country still lacks the ability to get the power to where it is needed. Consequently, the necessity to invest in robust transmission infrastructure is further underscored by the imperative to support nearshoring projects. If the country truly intends to take advantage of this historic opportunity for nearshoring, as several Mexican politicians have already stated, transmission infrastructure needs to be addressed.[11]

Additionally, solar and wind resources, abundant but very often regionally concentrated, necessitate the development of extensive transmission networks to distribute electricity across the country efficiently — but especially to areas that are attracting most of the nearshoring investment or to areas where the government seeks to incentivize nearshoring. Without a clear power distribution investment strategy, Mexico’s ability to capitalize on nearshoring and the kind of growth it can bring to the country will be limited. Thus, most participants agreed that solving the transmission problem is paramount, followed by carefully assessing actual generation requirements and integrating clean energy sources into the grid. This, of course, does not mean that the country is exempt from other challenges, such as clean energy requirements and grid reliability.

Table 1 — Evolution of Transmission Capacity in Mexico in Recent Years

The Mexican Constitution grants exclusive ownership and operational rights of transmission and distribution to the state. Mexico implements these rights through the state-owned electric utility company, the Federal Electricity Commission (Comisión Federal de Electricidad or CFE). Clearly, in theory, the constitution permits contracts between private entities and CFE, thereby facilitating private sector involvement not only in generation but also in transmission infrastructure. 

However, in practice, regulatory activity and administrative obstacles pose significant challenges to private participation, as workshop participants observed. Thus, the problem is not the constitutional and legal framework itself but rather the current policy, which deemphasizes and discourages private investment. Moreover, land rights, with their concomitant right-of-way complications, also emerge as a significant challenge, not only for transmission projects but also for any large-scale infrastructure projects in the country, given that nearly 50% of the land is socially owned.[12] The prevalence of agrarian law governing large expanses of Mexican land also underscores the complexity of navigating transmission projects.

Despite these challenges, notable initiatives signal progress. Querétaro’s forthcoming funds for a transmission line build-out via a private-public partnership exemplifies proactive efforts to address infrastructure deficits. However, while promising, these endeavors raise concerns about potential legal challenges and conflicts with centralized energy agencies — especially when the current administration has weakened regulatory agencies and the judicial system and ideologically prefers a state-led sector. Investor distrust has, understandably, increased. Nonetheless, initiatives, such as Microsoft's integration of green energy into their operations, signal a shift toward these decentralized solutions. 

In this regard, discussants underscored the importance of collaborative efforts in these partnership initiatives by involving multiple stakeholders, including federal and state governments, utilities, industry players, and financial institutions. States, such as Querétaro and Jalisco, lead by coordinating diverse stakeholders to promote infrastructure development initiatives, setting a precedent for other regions. This further implies that truly interested companies find ways to enter Mexico despite policy challenges. At the same time, this begs the question of whether Mexico would be interested if the policies were suitable for these opportunities.

In conclusion, transmission infrastructure remains an overlooked yet decisive aspect of Mexico’s power sector. Addressing this weakness is imperative for ensuring not only new investments but also energy security, facilitating economic growth, and mitigating risks associated with reliance on natural gas. As demand continues to rise, prioritizing transmission development is essential for navigating Mexico's evolving energy landscape.

Investing in Transition: Market-Oriented Policies and Reliable Energy Resources

The workshop discussion brought to light significant infrastructure deficits within Mexico’s electricity sector. The strain on the system is already evident, resulting in micro-outages that disrupt industrial operations and incur substantial costs for consumers and industrial users. The required investment scale is substantial, with estimates suggesting tens of billions of dollars to expand capacity by 75% over the next 10 to 15 years.[13] However, addressing the quantity of power available is only part of the challenge, as already suggested. Addressing the quality and reliability of electricity supply is equally crucial — especially for large companies who have pledged to reduce their carbon footprint on the planet. In this context, technological innovations offer a promising avenue to streamline solutions that would otherwise take too long to materialize. However, that will require a policy shift, where the government can allow companies to invest and provide incentives for the latest technologies.

For instance, DG arrangements, such as rooftop solar panels, present an opportunity to alleviate pressure on the grid and enhance resilience. There are significant advantages to DG, including the minimal costs of transmission. During the workshop, a proposal for a massive deployment of solar photovoltaic (PV) panels for the domestic market was discussed. It was also noted that such solar energy fields should be more modular to supply specific regions and needs. This solution would be faster to implement than large-scale projects that run thousands of miles across the country. It could be initially executed in regions with strained generation, transmission, or distribution capacity, especially those prone to receiving nearshoring investments.[14]

Even so, this approach is not a panacea. It does not solve the structural problems created by restrictive power sector policies — underpinned by an antiquated resource nationalism. At the same time, this approach could buy Mexico enough time to catch up with neglected large-capacity development in recent years. This will require the political will to adopt a paradigm shift of energy policy along with the necessary regulatory changes to secure reliable and sustainable energy resources for the potentially increased energy demand driven by nearshoring. Additionally, it would require a completely revamped institutional design that relies unequivocally on two pillars: 

1. Market-oriented policy solutions accompanied by a robust regulatory state. 
2. A steady focus on climate change and the need to fully engage in the energy transition.

Exploring innovative financing mechanisms, such as long-term loan programs or subsidies for solar panels, could expedite this solution. International development aid, particularly from the Biden administration’s focus on subsidizing renewables, presents an additional avenue for financing renewable energy projects in Mexico. However, this would require an effective renegotiation with Washington, which could involve opening the energy sector under the USMCA-mandated 2026 review and revisions. 

Even so, a transition toward DG raises fundamental questions about the future of the Mexican power grid. Participants highlighted the need for a clear policy framework delineating the objectives and priorities for the grid, ensuring alignment with broader energy goals, and facilitating private sector investment. In general, policy must be considerably more practical and less ideological for Mexico’s power grid to function at the level of requirements that the nearshoring opportunity presents.

Finally, regarding the importance of renewables and clean technologies, the discussion highlighted the significant financial support available, e.g., under the 2022 U.S. Inflation Reduction Act (IRA) commitment to invest $300 billion in addressing climate change and green technology.[15] Additionally, the 2021 Bipartisan Infrastructure Act allocates $136 billion to bolster the EV industry in the United States. These U.S. legislative initiatives are poised to have far-reaching implications beyond American borders, particularly in Mexico and the rest of Latin America. Notably, countries seeking to leverage these resources must have free trade agreements with the United States. Currently, 11 Latin American countries have such agreements in place, paving the way for substantial investments in charging infrastructure.[16] With the demand for EVs projected to triple by 2030, these legislative measures are anticipated to drive significant growth in the clean transportation sector. Mexico is falling behind on this score, and it must create a strategy to couple its power development with U.S. policies. 

In sum, embracing technology-driven solutions and fostering an enabling regulatory environment will be critical for navigating the evolving energy landscape and unlocking the full potential of renewable energy in Mexico. It will also be necessary to maintain good relations in case of a potential second Biden administration.

Key Takeaways

1. Political Dynamics: The relocation of supply chains from Asia to the United States and U.S. allies is a complex trend, shaped by multiple factors, including key domestic and international fundamentals. While this trend is primarily propelled by U.S.-Chinese geostrategic competition, among the variables shaping U.S. relocation flows toward Mexico are the current domestic politics within each country — their presidential elections in 2024 and the impending review and revision of the USMCA in 2026. No factor, however, is more important than Mexico’s current public policy landscape, which complicates decision-making for investors and thereby Mexico’s ability to take advantage of nearshoring opportunities. Given this environment, nearshoring decisions are likely to remain uncertain for most companies in the coming years.  
    
2. Challenges in the Power Sector: Among the many challenges within Mexico, several are related to its power sector with significant demands in two key segments: generation and transmission capacity. Many of the prevailing preferences in Mexico’s policymaking and administrative bodies in the energy sector impede rather than facilitate market-led growth, where the potential to help expand generation and transmission capacity is much greater. The Mexican government prefers to rely primarily on state-led efforts, where the ability to finance power generation and transmission infrastructure and manage the grid are limited and inefficient. The power sector is, in fact, subject to ideological challenges concerning the roles of the market and the state, to the point of affecting investment protection guarantees. This further hampers private investment in the development of crucial infrastructure — e.g., in transmission lines — and lowers investment protection thresholds, which discourage nearly all investment. 
    

3. Critical Priorities for the Next Administration in Mexico: The next administration must prioritize strategies to address critical issues, such as speedier and cleaner power generation and a more robust transmission infrastructure. Pursuing these priorities would produce the following changes:

   • Unleashing the power of private investment or public-private partnerships.
   • Restoring autonomy to regulatory agencies and ensuring the impartiality of the judicial system. 
   • Broadening assurances that all investment will be protected.

   Without addressing these priorities, Mexico’s energy sector will continue to face constraints, limiting the country’s attractiveness for nearshoring activities.

4. Private Participation and Investment: Mexico will need tens of billions of dollars in investments for energy infrastructure development between 2023 and 2037.[17]  Reliance solely on government financing is untenable, as the next government is likely to experience a tighter fiscal policy than the current administration did. In fact, private participation will be essential to bridge the investment gap in power infrastructure and accelerate the deployment of renewable energy technologies critical for the energy transition. Without it, it is unlikely that Mexico will meet its growing demands and take advantage of many of the opportunities for green-field investment that nearshoring promises. 
    
5. Focus on Renewables and Technology: Mexico is lagging both in its transition to renewable energy and its commitments to mitigate the effects of climate change. Introducing technological innovations will be crucial for addressing the existential challenges of the climate crisis and Mexico’s energy transition. Current policies do not encourage such technological innovation either. Thus, a new institutional design or national model centered around climate crisis mitigation and energy transition is necessary to navigate the complexities of the current energy landscape effectively. Many companies, especially those who seek to meet their own commitments to counter climate change, will likely look elsewhere to establish their operations.

Policy Recommendations

Faced with growing geostrategic concerns in relation to China and a much more uncertain security landscape around its global supply chains, the United States implemented a series of legislative and administrative actions to incentivize the relocation of supply chains — especially in strategic sectors — back into the country.[18] 

However, not every company can easily bring back its production operations to the United States, as some conditions would reduce their competitiveness, including higher wages. Even so, given some of the legislative incentives and political pressure to relocate, many companies have sought to bring their operations to countries closer and friendlier to the United States. These relocation sites include Mexico, which is ideally positioned for many of these companies to nearshore their production. Mexico’s privileged position for the nearshoring of supply chains is underpinned by:

1. Its geographic adjacency to the United States.
2. Its much lower production costs. 
3. The relatively stable investment climate that stems from the USMCA trade agreement. 

However, the nearshoring landscape in Mexico has turned out to be much more challenging than expected. The ease of relocating supply chains to Mexico is, in fact, the product of a complex interplay among domestic, international, and binational dynamics, all of which shape the decisions of companies seeking to establish operations in the country. Some of these dynamics include a less than friendly private sector environment in Mexico, the imminent review and revision of the USMCA trade agreement in 2026, and growing uncertainty in the political environments in the United States and Mexico — primarily marked by the rematch between President Joe Biden and former President Donald Trump. These layers of uncertainty make nearshoring decisions difficult for many manufacturers, especially for smaller and mid-level businesses.

Electricity

Other challenges of Mexico’s current policies will likely limit the country’s ability to take full advantage of supply chain nearshoring. One of these challenges is a hobbled electricity sector. Power is an essential element for manufacturing chains, and Mexico seems unable to find a formula to provide a sufficient, reliable, and clean supply for electricity. To a large extent, this inability is the direct result of an old commitment to resource nationalism, which has affected the entire energy sector, including electricity, as well as an unresolved vacillation between market liberalization and resource nationalism that has characterized the energy policy debates in Mexico for the last 80 years.[19] 

For example, despite a much more liberal power law passed in 2013–14, the López Obrador government (2018–24) enacted policy changes that have obstructed private investment, made political use of power generation permits, reduced the autonomy of independent energy regulatory agencies, and generally discouraged private investment in the power sector.[20] The ideologically-driven policies of the López Obrador administration have had the intended effect of reducing private participation in the power sector, both in generation and in transmission. These policies have further discouraged potential investors from transferring capital to the country’s energy sector as a whole.[21] Thus, this reduction in the country’s attractiveness as a nearshoring destination is downstream and relevant to our study.[22]

Looking ahead, if Mexico is to take advantage of nearshoring opportunities, the priorities for the next Mexican federal administration (2024–30) to meet these challenges are clear. New policy directives must aim to achieve the following: 

1. Unleash the potential of the private sector to accelerate investment in the power sector to increase the supply of electricity. 
2. Boost production of natural gas to support the expansion of power generation. 
3. Incentivize the introduction of technological innovations in power generation, especially in relation to clean energy.
4. Address the critical limits to the state of power transmission infrastructure. 
5. Restore regulatory autonomy to the industry’s governing bodies. 
6. Reinforce investment protection measures. 

Without these policy changes, the country will not be able to provide the investment required in generation and transmission in the power sector over the next decades or to attract the kind of investment that it expects from nearshoring.

In other words, relying solely on public financing and state-led development to meet the country’s future energy needs is financially and technologically unfeasible — especially given the increasingly tricky fiscal conditions the next government will inherit. Consequently, without these suggested policy changes, attracting nearshoring investment will be permanently constrained.

Climate Change

Of these issues, one deserves particular attention. The next administration will have to address two key issues closely related to climate change: 

1. It needs to make a turn toward renewable energy generation, as businesses will increasingly demand this transition.
2. It needs to expedite technological innovation in the power sector to accomplish a transition to a clean power supply.

These two issues will likely emerge as central pillars not only to address self-imposed policy limitations to Mexico’s power sector and boost the country’s participation in mitigating climate change, but also to meet the greener energy demands of investors and companies in the next decade. 

Solar DG can alleviate pressure on the grid and drive clean energy adoption nationwide, rechanneling existing subsidies for residential consumption. This action needs to be part of the next administration’s policy portfolio. Any initiative on DG can help, of course, by introducing targeted interventions in regions prone to receive nearshoring investments, such as Nuevo León and other border states, but the entire country’s need will eventually have to be addressed for more evenly distributed investment attraction and consequent economic development. Without addressing all these issues simultaneously, the country will not be able to capitalize on the nearshoring wave, even if it creates a patchwork of policies aimed at solar DG. To expand and modernize its electric grid, private participation is also imperative if Mexico is to bridge the gap between current power generation and distribution capacity, so that the country can take full advantage of the historic nearshoring opportunities available in the coming decade.

Altogether, these changes will require a paradigm shift in Mexico’s approach to the power sector. This should include a completely revamped institutional design that relies unequivocally on two pillars: 

1. Market-oriented policy solutions accompanied by a robust regulatory state. 
2. A steady focus on climate change and the need to fully engage in the energy transition. 

These policy recommendations demand regulatory and normative amendments to the current power sector in the entire country. Interestingly, a major constitutional reform is not required, as the current version allows for accommodating these changes. By simply acknowledging and tackling these challenges head-on within the current legal framework, Mexico will position itself as a leader in sustainable nearshoring practices by attracting investment and driving economic growth while prioritizing environmental stewardship and energy security.

Acknowledgments

The series of workshops and this publication are generously supported by The Nearshore Company and Roger González Lau.

Notes

[1] For example, Microsoft has made commitments to worldwide carbon-neutrality by 2045 or 2050 and is a high energy user with its cloud computing (Azure) expansion located in Querétaro (Microsoft, “Microsoft Anuncia Avances e Impacto Inicial de su Primera Región de Centros de Datos en México,” February 27, 2023, https://news.microsoft.com/source/latam/noticias-de-microsoft/microsoft-anuncia-avances-e-impacto-inicial-de-su-primera-region-de-centros-de-datos-en-mexico/).

[2] Secretaría de Energía (SENER), Programa de Desarrollo del Sistema Eléctrico Nacional, 2023–2037 (Mexico City: SENER, May 2023), 41,  https://biblioteca.semarnat.gob.mx/janium/Documentos/Ciga/libros2023/CD008843.pdf.

[3] According to a workshop participant’s calculation based on Programa de Desarrollo del Sistema Eléctrico Nacional, 2023–2027 (PRODESEN) estimations (SENER). 

[4] Some workshop participants, including C-level executives and researchers who have conducted extensive fieldwork, claim that energy capacity is among the most significant obstacles for industry relocations.

[5] SENER, PRODESEN 2024–2038, https://www.cenace.gob.mx/Docs/16_MARCOREGULATORIO/Prodecen//20%202024-2038%20Cap%C3%ADtulos%201%20al%206.pdf.

[6] Roberto Duran-Fernandez, “Nearshoring y México: Pasado, Presente, y Visión de Futuro de la Globalización,” in Nearshoring: Retos y Oportunidades para la Integración y el Fortalecimiento de los Cadenas Globales de Valor en México, edited by Osmar Hazael Zavaleta Vázquez and Santiago Velázquez Urgel (Mexico City: Tirant lo Blanch and Tecnológico de Monterrey, 2024), 15–31.

[7] Valentine Hilaire, “Amazon’s AWS to Invest over $5 bln to Boost Cloud Computing in Mexico,” Reuters, February 26, 2024, https://www.reuters.com/technology/amazons-aws-invest-over-5-bln-boost-cloud-computing-mexico-2024-02-26/.

[8] David A. Gantz, “Will New Chinese Investment in Mexico Benefit North America?” (Houston: Rice University’s Baker Institute for Public Policy, March 23, 2023), https://doi.org/10.25613/RQD0-KA34. 

[9] Gantz, “Excluding Mexican and Chinese EVs from the United States” (Houston: Rice University’s Baker Institute for Public Policy, March 19, 2024), https://doi.org/10.25613/SFE7-ZW32. 

[10] Israel Alpizar-Castro and Carlos Rodríguez-Monroy, “Review of Mexico’s Energy Reform in 2013: Background, Analysis of the Reform and Reactions,” Renewable and Sustainable Energy Reviews 58 (May 2016): 725–36, https://doi.org/10.1016/j.rser.2015.12.291; Rafael Llano, Francisco de Rosenzweig, and Marièle Coulet-Diaz, “Energy Investors Face Mexico Risks in the Electricity and Lithium Sectors,” White & Case, July 19, 2022, https://www.whitecase.com/insight-alert/energy-investors-face-mexico-risks-electricity-and-lithium-sectors.

[11] Among the key stakeholders supporting this claim is Congresswoman Marcela Guerra Castillo, president of Mexico’s House of Representatives (“Urge Dip. Marcela Guerra Invertir en Electricidad para Aprovechar el Nearshoring,” Energía a Debate, June 10, 2024, https://energiaadebate.com/urge-dip-marcela-guerra-invertir-en-electricidad-para-aprovechar-el-nearshoring/).

[12] Instituto Nacional de Estadística y Geografía, “Resultado de la Actualización del Marco Censal Agropecuario 2016,” July 5, 2016, https://www.inegi.org.mx/contenidos/programas/amca/2016/doc/pr_amca2016.pdf.

[13] According to a workshop participant’s calculation based on PRODESEN estimations (SENER).

[14] Rolando Fuentes, Duran-Fernandez, and Miguel A. Montoya, “Prices Versus Quantities: Re-thinking Electricity Subsidies in the Context of Nearshoring in Mexico,” Oxford Institute for Energy Studies, March 2024, https://www.oxfordenergy.org/publications/prices-versus-quantities-re-thinking-electricity-subsidies-in-the-context-of-nearshoring-in-mexico/.

[15] International Energy Agency (IEA) and International Finance Corporation (IFC), Scaling Up Private Finance for Clean Energy in Emerging and Developing Economies (Amsterdam: IEA Publications, June 2023), 78–80, https://www.ifc.org/content/dam/ifc/doc/2023-delta/scaling-up-private-finance-for-clean-energy-in-edmes-en.pdf; Organization for Economic Cooperation and Development (OECD) et al., Latin American Economic Outlook 2022: Towards a Green and Just Transition (Paris: OECD Publishing, 2022), https://doi.org/10.1787/3d5554fc-en.

[16] For a current listing of U.S. free trade agreements, see “Free Trade Agreements,” Office of the United States Trade Representative, accessed April 24, 2024, https://ustr.gov/issue-areas/industry-manufacturing/industrial-tariffs/free-trade-agreements.

[17] According to a workshop participant’s calculation based on PRODESEN estimations (SENER). 

[18] For a list of these incentives and discussion of their expected effects, see The White House, “Inflation Reduction Act Guidebook,” August 17, 2022, https://www.whitehouse.gov/cleanenergy/inflation-reduction-act-guidebook/; and The White House, “FACT SHEET: CHIPS and Science Act Will Lower Costs, Create Jobs, Strengthen Supply Chains, and Counter China,” August 9, 2022, https://www.whitehouse.gov/briefing-room/statements-releases/2022/08/09/fact-sheet-chips-and-science-act-will-lower-costs-create-jobs-strengthen-supply-chains-and-counter-china/.

[19] Fuentes, “Mexico’s Energy Dilemma: Resource Nationalism vs Market Liberalisation,” Oxford Institute for Energy Studies, March 2007, https://www.oxfordenergy.org/publications/mexicos-energy-dilemma-resource-nationalism-vs-market-liberalisation/. 

[20] de Rosenzweig et al., “Initiative to Modify the Electricity Industry Law,” White & Case, February 3, 2021, https://www.whitecase.com/insight-alert/initiative-modify-electricity-industry-law.

[21] Llano, de Rosenzweig, and Coulet-Diaz.

[22] Miriam Grunstein, “Some Like It Hot: Mexico’s Ambivalent Policy toward Climate Change” (Houston: Rice University’s Baker Institute for Public Policy, June 15, 2023), https://doi.org/10.25613/4gv7-2548.  

This publication was produced in collaboration with the Baker Institute Center for the U.S. and Mexico. Wherever feasible, this research was reviewed by outside experts before it was released. Any errors are the authors’ alone.

This material may be quoted or reproduced without prior permission, provided appropriate credit is given to the author and Rice University’s Baker Institute for Public Policy. The views expressed herein are those of the individual author(s), and do not necessarily represent the views of Rice University’s Baker Institute for Public Policy.